Hi,
very often in these questions, people seem to confuse the nature of costs (fixed or variable) with the distinction between investment and costs (and cash out, which is a topic for another post).
So:
- Capital Expenditures are NOT costs. They are investments (=do not show up in the company's P&L, only in cash flow statement)
- Capex are translated into costs through Depreciation and Amortisation. So you invest 1 million into something this year, depreciate it over 10 years, so the resulting COST this year is 100k. (assuming you bought it on Jan 1st ;-) )
- Depreciation is (in a short-term view) always a FIXED cost. Once the investment is done, there are not many legal ways to change depreciation.
Marketing and maintenance costs are in their nature variable. It may not be a good idea to vary them, but they are variable. They do, however, not necessarily vary WITH OUTPUT. I'm saying not necessarily because there may be marketing costs (PPL or CPO ads for example, that may actually vary with output). But for most intents and purposes in a case, you can put marketing and maintenance into the fixed cost bucket which needs to be recovered through the raw margin of the product.
The raw margin of the product is the price of the product minus those costs that are directly affected by output (i.e. you produce 1 car, you incur the cost for 1 steering wheel, 2 tail lights, 4 tires. If you produce 2 cars, you need 2 steering wheels....) You get my point...
Hope this helps
Hi,
very often in these questions, people seem to confuse the nature of costs (fixed or variable) with the distinction between investment and costs (and cash out, which is a topic for another post).
So:
- Capital Expenditures are NOT costs. They are investments (=do not show up in the company's P&L, only in cash flow statement)
- Capex are translated into costs through Depreciation and Amortisation. So you invest 1 million into something this year, depreciate it over 10 years, so the resulting COST this year is 100k. (assuming you bought it on Jan 1st ;-) )
- Depreciation is (in a short-term view) always a FIXED cost. Once the investment is done, there are not many legal ways to change depreciation.
Marketing and maintenance costs are in their nature variable. It may not be a good idea to vary them, but they are variable. They do, however, not necessarily vary WITH OUTPUT. I'm saying not necessarily because there may be marketing costs (PPL or CPO ads for example, that may actually vary with output). But for most intents and purposes in a case, you can put marketing and maintenance into the fixed cost bucket which needs to be recovered through the raw margin of the product.
The raw margin of the product is the price of the product minus those costs that are directly affected by output (i.e. you produce 1 car, you incur the cost for 1 steering wheel, 2 tail lights, 4 tires. If you produce 2 cars, you need 2 steering wheels....) You get my point...
Hope this helps